Getting Earnings Right with Deutsche Bank's Binky Chadha

31:07So, there's idiosyncratic, but it's cycle and trend and what drives basically the cycle. It would be, you know, ISM manufacturing, the U.S. dollar. ISM manufacturing is an interesting one because that's historically the one thing that explained S &P 500 earnings extremely well. And that's kind of like all you needed to know. Still today? Does it still have that correlation? So, basically for the last three years, it hasn't been the case. And why? It's simply because of mega cap growth in tech. If you take the S &P 500, you break up its earnings into mega cap growth in tech and everyone else. You'll see that everyone else is still currently aligned with the ISM manufacturing.

31:47ISM manufacturing has been in a funk for three plus years now. And so we haven't had growth. So I kind of hinted earlier, you can look at the current, you know, sort of context in a bearish way. That is, all the growth is coming from 90 % of S &P 500 earnings growth has come from mega cap growth in tech. or you could take the view going forward that everybody else is going to recover. That's the camp that we are in. That everyone else will be catching up to tech eventually. Exactly. Their earnings are completely aligned with the ISM manufacturing in the U.S. ISM manufacturing is basically, and that's historically the case for the entire index's earnings.

32:30We've been in a funk for three plus years. We've been, ISM manufacturing has been between 46 and 50. So, you know, it's something that we've never seen historically. So if you ask, why are we sitting here? Well, first thing to note is that if, you know, things were bad, then we should have been going down. We shouldn't be sitting in mildly contractionary. 50 is the dividing point. Above 50 is the dividing point. But I mean, I think the fair or I mean, conceptually, it's the intellectually, it's meant to be the dividing point. But this is still slightly positive growth, even below 50. To get to negative growth, you have to go quite a bit lower.

33:08And I would argue in the first instance, it was basically just the hangover from the pandemic. So you remember that as we came out, you know, we had basically massive spending on goods. And that in some way involves manufacturing. And then we had basically the slowdown and the rotation. Reminds me a little bit of what took place in the run up to Y2K in 2000. You had all this tech spending pulled forward, and then it was soft for a year or two. Right, right. And it's been followed, basically, by a whole set of things. Number two, on the hangover, I would say, I don't think a hangover has killed anybody.

33:51So, a hangover is holding time, basically, and it would naturally, basically, pass. But then in early 2022, we got the Russian invasion of Ukraine. We had$120 oil. And if you look at oil prices today, what we've had is basically we've gone from$120 to, in round numbers,$60. But it's taken three years to get there. And what the three years to get there means is that energy earnings on a year-on-year basis have been negative, basically, or contracting for three years. Now, the good news is that we are much closer now to basically what I would think of as fair value for oil prices. That's actually a little bit higher.

34:39It's not a tradable difference right now, but fair value is probably$64,$65. And so, you know, this drag should basically stop soon, even though for the third quarter, we're still looking for 15 % down. So, energy. In energy. In energy earnings. So it's just mostly oil prices. And energy vertical is important, basically, for various parts of manufacturing. Then we have basically idiosyncratic issues in autos and Chinese autos in particular. And of course, last but not least, we have the tariffs this year, which impacts manufacturing. We're going to talk more about tariffs shortly. I'm kind of fascinated because I'm hearing in your laying out where we are today a lot of different voices.

35:26And at a shop like Deutsche Bank Securities, you have to have so many different perspectives, opinions from different quarters, from the economists, from the FX traders, from everybody. How do you navigate and organize all of these different perspectives, some of which may be in conflict with others? Sure. I wouldn't describe it as conflict. I mean, we are encouraged to have our own different views. A broad dispersion of views. Is that a fair better? Absolutely. So what I was always told by our head of research, David Fogart-Salandau, you know, so if I ask you at the end of the year, why did you get your S &P 500 call wrong?

36:11You're not to tell me that. The economist was bearish, right. That doesn't work. So you are responsible for everything that goes into your view. And so we discuss and debate. So as far as the research aspect of it is concerned, in terms of the strategists across all asset classes and economists, we have a regular meeting. We just had one this morning, actually. So let me ask you a question. You mentioned ISM. What leading indicators do you put the most amount of weight on and what indicators do you think aren't all that important for forecasting the economic and or market cycle? So we always start with our economists forecast and we always ask the question of, does this make sense to us?

37:00Does this make sense to, you know, the way various, you know, economic data are behaving? So, I mean, if you think about the U.S. and 2023, when everybody's calling for a recession, there was this annoying fact, which was if you simply said, OK, I just landed here. So, you know, OK, we're talking about the U.S. potentially going into a recession. You know, let me start by looking at GDP. And you would find that near 70 percent of U.S. GDP in real terms comes from personal consumption spending. Everybody knows that. So why don't we just draw a chart of it? And because I come from a relatively volatile asset class, I don't do any growth rate terms.

37:47I just plot the level. You got to take logs because we all know why we should take logs. And then I draw channels around it. And if you look at real personal, you know, personal consumption spending in the U.S. for the five years before the pandemic, we are in this tight channel growing steadily at two and a half percent a year. Pandemic collapse, recovery of PCE back magically into exactly the same channel. Magically. So this is 21 and the same applies during 22 and the Fed is hiking aggressively. Right. And personal spending just continues in the middle of the chow. And it was almost like there's nothing to see here.

38:30Right. Well, we had three handle on unemployment. Wages were actually rising as fast, almost as fast as inflation, other than that 9 % peak. Why wouldn't the economy and market do well? He says with perfect hindsight. To fast forward to this morning, where is BCE? It's right in the middle of the chow. I would say if you, you know, there's a couple of different variations of looking at it. And the headline number is actually at the top of the channel and moving along. And, you know, we did have some slowing in the first quarter, but it was at the risk of going way out of the channel. And it just sort of moderated and went flat.

39:12And since it got back to the channel, so it's the same thing. And PCE is important because that's a key indicator the Fed looks at. It's 70 % of US GDP, yeah, absolutely. I think that's Jerome Powell's favorite data point. Yeah. So he focuses more on the inflation in there. So I'm talking about really the real volume or the measure that we have, which is in real terms. I'm just saying if that's 70 percent of GDP and that's growing steadily and it's been doing. We're in the same place that we've been in for 10 years, growing in, you know, at what I would describe as a two and a half percent trend rate.

39:49So that that sounds pretty bullish. I'm going to ask you in a little bit about cautious issues and risks. We'll circle back to that. But given the relative strength of the U.S. over the past 10 to 15 years and the fact that you've just gotten back from Asia and Europe before that, how do you look at the rest of the global economy? What's happening in Asia? What's happening in developed ex-U.S. Europe and elsewhere? Absolutely. So, you know, there's a chart that I'm going to draw for you or really two charts. And what I would say, I kind of already described the U.S. chart, which is, you know, a steady trend channel growth of two and a half percent before the pandemic.

40:35Steady, you know, two and a half percent growth since then. If you look at the rest of the world, the trend rates are different. So if you use Europe as an example, but the same applies basically to various other regions. We were growing steadily before the pandemic at sort of a 2 % rate. Then we had the pandemic collapse. And just like the U.S. recovering back basically to the trend line. But that was in the first quarter of 2022. So it is really Russia, Ukraine that then basically arrested that recovery back to the trend. And basically, activity in Europe, you know, it's essentially gone sideways to very slightly up in the decimal points, I would say.

41:20And it is a very large gap, basically, relative to trend. And so, what I would argue is that, you know, there was nothing exceptional happening in the U.S. in absolute terms. It was really in relative terms because the rest of the world wasn't really growing. I'm using Europe as an example. You know, China, Japan, slightly different. But I think the European example is sort of key. And so if you think about things like FX and the U.S. dollar, I mean, U.S. dollar typically does long multi-year cycles. We were sitting at the top of the band for three years. So I think about it as a multi-year trade or trend basically waiting for a catalyst.

42:06and waiting for the catalyst is just, you know, is the rest of the world going to start to grow? And in the case of Europe, you know, what we had basically, so we went long European equities on the first Monday of the year. All the credit goes to my colleague, European equity strategist, Max O 'Lear. That's a great, great call. It was just the view that everybody was short Europe. Everybody's going to cover their shorts, or at least some people are going to cover their shorts going into the election, given the platforms, which they began to do. And after they covered their shorts, it became a question of, you know, from a fundamental point of view, you know, is this going to happen?

42:50Now, in terms of policies, it's going to happen. So if you look back for the last few years, you know, as a policymaker, you want to do something about this. But maybe that shock was already gone and you're going to start growing anyway. And so now you have that plus a whole set of additional, you know, incentives to basically to spend infrastructure. Then there's the defense issue. So I would argue it happens. And is this early days in the resurrection of European equities or is this a one year, one time? It depends on whether you believe the growth will happen and sustain. I'm in that camp. So I would argue it's still very early days.

43:39And so we are actually, from a positioning point of view, we are overweight the U.S., which is what we've been talking about. But we're also overweight Europe. and overweight Europe, not because I'm expecting it to match the U.S. in performance through Europe. Just doing so much better than it used to. But I think it's important to keep in mind that so far we have very little evidence that Europe is actually growing. And if anything, over the last few weeks, the data has kind of disappointed. It doesn't negate what is likely to come. And then you look at the Europe. I mean, you know, getting disappointment.

44:17We moved up because Europe might grow and, you know, it hasn't. But, you know, we have trouble getting below 116. So the market is, you know, very much, I would say, you know, concerned that the growth actually happens. So I'm staying overweight because you have to get in before it happens. And given the gap basically in the level of activity, in the level of earnings relative to trend lines, you know, you could gap up at some point. Really? And so it's not just about tomorrow's earnings number. So we start getting positive growth news out of Europe. All bets are off at that point. Exactly. At that point, it's already half of it's already happened.

45:06Wow. So let's talk a little bit about U.S. economic growth. We earlier discussed Asia and Europe. You have said we have resilient corporate earnings with forecasts that are in the low double digits, robust risk appetite, and major buybacks that are likely to rise as earnings rise. What's not to like about the U.S. market? Not too much, I would say. I think that, you know, going back to what I said earlier, 2023, we're waiting for the recession. 2024, waiting for the election. There's a lot, basically, of demand, pent-up demand for a variety of activities. You're talking pre-November 2024, so the prior year.

45:58Right. But what I'm saying is that while, you know, the backdrop and the context has been very good, it's been very strong. It hasn't really been it hasn't really been buy into it because there's been something massive to worry about, like a recession in 2023. And so I would argue after the Liberation Day shock. So I would say around the election last year, there was a lot of buy into a very optimistic take. So we spend one of our frameworks that we spend a lot of energy on is our equity positioning framework. And if you look at where we are today, and that's what I'm saying, there's limited buy-in, is my positioning measure, it's a Z-score measure.

46:39So typically, I mean, plus minus one, it's sitting at plus 0.5. But what I would point out, so markets clearly overweight, that entire overweight characterization is coming from the positioning of systematic strategies who are not following or thinking about fundamentals. If you think about the discretionary… When we say systematic, it's quantitative, it's trend-based, it's earnings growth-based. So, I have three in particular in mind. So, there's the vol control, there's the CTAs, and then there's the risk parity funds. CTAs meaning mostly trend-following commodities, things like that. So it's about trend and vol.

47:19It is a good summary of each of the three, basically. I mean, and if you look at systematic strategies positioning, you know, it's hard to come up with an intuitive, simple measure of what is the trend. That's what a lot of that exercise is about. But the other part is very easy, which is basically vol. You can use any measure of vol that you like, and it explains basically their positioning. So, we had Liberation Day collapse. We had April the 9th when the cause of the volatility basically diminished or went down. And so, we had the fastest recovery from a vol shock ever. But there's been very limited buy-in, I would say, from discretionary investors who are actually sitting at neutral.

48:07Discretionary is as opposed to systematic, but discretionary you want to think about as fundamentals-based investors. Let's take that apart because that's kind of fascinating. Because on the one hand, there's been a bubble in bubble forecasts. That's an old joke. We've heard that for decades. But really, it seems like everybody is saying, oh, there's an AI bubble. There's a market concentration bubble. And the market seems to not care, and it just keeps powering itself higher. Let's talk about the policy issues you just raised. So despite Trump won with some tariffs that were, I don't know, about 10 percent and I'm tariff man, it's the most beautiful word in the dictionary.

48:51Despite all of that, a failure of imagination on all our parts. April 2nd shocked everybody with 100 percent tariffs. I don't think anybody imagined it. and we had that very rapid sell-off over the next week. Then the 90-day pause and markets took off. But at the end of the 90-day pause, markets just kind of kept going. Kept going, yeah. How do you put this policy into context? And when you say there's not buy-in from the discretionary part of the equity markets, somebody's buying. Is it just systematic or? So it's systematic strategies. And I would say, you know, We are sitting here in the first week of October.

49:34So if you think about September and just the very, very steady, steep climb. Huge gains in September. So what we got in September is basically big inflows. And I want to say Q3 2025 was like the seventh best quarter going back to World War II, some crazy number like that. So last month, we had the highest inflow into bonds and equities as a group ever. $200 billion into just one month. Do you pay attention or care about the$7 trillion in money market funds? So I think that's partly a red herring in the sense that basically it is a reallocation away from bank deposits. So if you take the sum of money market funds and cash deposits, the line's kind of going up, but it's going up in line with its trend because cash holdings are going up.

50:36So the two things are just sort of a wash. Because some people have been claiming that is the next source of fuel for equities. I'm in your camp. I think that money mostly came from low-yielding bonds or checking and savings accounts. I think it's very important to keep in mind that we're having a boom in inflows across all asset classes. Really? And it's been going on for two years, if not longer. And as to the question of why we're having this boom, our take is basically that you have to start historically first. So we're talking about how things changed relative to history. So the pattern was that U.S.

51:21households would put about 50 percent of the new savings. So you get a paycheck, you spend some is left in the bank account and then you allocate basically some of it. But historically, about half of all household savings, it would stay in cash. Half would basically go into financial assets. And so if you think about the cash holdings of households, it's a very, very steady, clear trend line. And what the pandemic did, partly because people spent less, partly because they were getting checks in the mail or directly deposited in their bank accounts, their cash holdings went way, way up relative to trend.

52:06We then had a period where, because you just over allocated relative to trend, a period of cash going sideways so that all new savings, 100 % of it was going into financial assets and into all financial assets. I mean, bonds were actually the bigger beneficiary than equities, believe it or not. Most people think it's equities first, but it's across that. So crypto, commodity funds, you name it. But it goes all the way back to the pandemic. And it's not done yet, is the way I would put it. So you were talking about trade earlier. One of the comments you made really I found fascinating. Markets often price in trade deal hopes early.

52:56Are we over-discounting the impact of tariffs or are markets being too optimistic? or how do you contextualize? You know, we've been waiting to hear about all these tariff deals. We really haven't heard of. I think we have one with the UK. That's kind of it and Japan. Right.

53:19Are markets not paying enough attention to tariffs or are markets saying, hey, the president lost at the court of trade. He lost at the court of appeals. Maybe he's going to lose at the Supreme Court. How are we looking at tariffs? So first, you know, a confession, which is basically after April the 2nd, you know, if you thought through the impact of the announced tariffs, you were going to come to a very, very negative conclusion. Right. And that's what we did. And so we lowered our numbers. We always built in that there would be what we call a relent on policies. It's just like trade war 1.0.

54:01When the market is up, you know, he would escalate. When the market was down, he would de-escalate. People have called that. I heard a couple of options traders call that the Trump collar. The Trump collar. So unlike the Powell put, this is the Trump collar. Right. When markets are high, he's emboldened. When they're low, all right, we're going to pause this and let the dust settle. Exactly. That's kind of, you know, where we were. And so the call was that we would go a lot higher, but a lot less than we had originally thought, basically. And we have since basically raised both our earnings numbers and our target.

54:41What's your S &P 500 to 7 ,000? So on January 1st, it was 7 ,000. And today it's again back to 7 ,000. You lowered it because of tariffs and then raised it again. And then raised it in two steps. But your question on, you know, are the tariffs having an impact? What I would say is that there's sort of different dimensions. So, this is kind of a big question because it impacts everything. So, first is growth. We kind of spoke about that a little bit, macro growth. And what I would say is that so far there is, I mean, the logical and intellectual case for a slowing because of very high tariffs or a new tax, you know, is impossible to refute.

55:26And I'm not refuting it, but I'm just saying there's like no evidence of that because other things are basically dominating. So I talked about what the consumers are doing, what they've always been doing, et cetera. But if you look at macro growth, I also said that what we're going through is a mini version of 2023 because everybody took a negative view. That negativity is extremely important part of the positivity in terms of the price action. Markets climb a wall of worry, right? Exactly. And, you know, our equity is going to go down if somebody raises their GDP growth numbers or their earnings numbers.

56:01So that negativity is a positive force for now. Our economists, so Matt Lazzetti, has a 2.8 % GDP growth number for the third quarter. That's, you know, one of the highest numbers I've ever seen for me. Atlanta GDP now is even higher than that. It's close to four before the data started to disappear. here. And so, you know, number one, no sign of it in terms of growth, if you do and think about in terms of earnings. So there should have been a big impact in the second quarter. Earnings growth in the second quarter actually picked up from where it was in the first quarter. So even the sign is wrong, it's going in the other direction.

56:44Number three, qualitative read on earnings, which I would argue is more important than just the numbers. And companies just basically saying that, yes, this is a negative shock. Yes, it's a big deal, but it's, you know, it's not way out of basically the realm of, in many cases, even for machinery companies, within the realm of, you know, our guidance range. So, yes, it's negative, but it's not having such a huge impact. And the impacts are basically, you know, modest and manageable. And there's a level at which you can think about the numbers. What are the numbers? So the effective tariff rate, defined as basically tariff revenue on the Treasury's website, divided by the value of imported goods, it was kind of stuck at 10%, 11%.

57:38And maybe it's a little bit higher right now. So the market's working with something like 15%. So we still have a ways to basically get there. And the underlying thesis has been basically that if there's a problem, you will get relents and exemptions. So there's a lot of exemptions. And that's part of the whole thing. The other dimension, of course, is inflation. So let's talk about that. You know, did it already happen or is it still to come? One simple way. I mean, there's no way to answer the question with 100 percent certainty. But what I would say is that if I take a look at core goods prices or core CPI, if you want, and what you will see is that the norm is for goods prices to be deflating.

58:25And we have the post-pandemic 10 % increase in the chart of the price level. We jump up by 10%, 11 % in a relatively short period of time. And then that's done with and we start disinflating at the same historical trend rate. It's a very modest, mild deflation. And what we've had over the last three months is a clear increase up. So some impact of the tariffs has already happened. Question is, how much? And I would say relative to the trend line, core goods prices are probably one, one and a quarter percent higher than they would have been if we had just continued basically down that trend line.

59:07And so how to basically, you know, handicap that one, one and a quarter percent? We have in-house from our rate strategist, a bottom-up measure basically of the direct impact of tariffs. So you go SIC code by SIC code, you add it up and then you calculate. And they calculate to 2.5%. So a simple point I would make is it looks like half of the direct impact already happened. And if half of it, you know, it wasn't so bad, how much should we fear the second half? Coming up, we continue our conversation with Binky Chata, Chief U.S. Equity and Global Strategist and Head of Asset Allocation at Deutsche Bank Securities, talking about his roles at Deutsche Bank.

59:53I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

1:00:12I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Binky Chata. He's chief U.S. equity and global strategist, as well as head of asset allocation at Deutsche Bank. You're very constructive about additional Federal Reserve rate cuts this year and next year. And the people who are a little bearish on that are saying, hey, tariffs are going to be very inflationary. We're seeing a reacceleration. This isn't a noisy blip, but it's a start of something worse. We're going to end up at four, four and a half, 5 % inflation, which would put the Fed on hold.

1:00:50Walk us through your thinking on how many more rate cuts this year and next year. It sounds like you've already given the game away because - No, no. Actually, I'm not counting on rate cuts. And I would argue the rate cuts are you know, much more of a sideshow, basically, for earnings. We're so hyper-focused on them. At least the media is on. It's, you know, everybody is, if we get these rate cuts, it'll unfreeze the housing market. It'll do all these great things. No, I mean, to unfreeze the housing market, you need longer-end yields to basically go down. Which have not happened yet. They are pretty much on the low side, I would argue, relative to, So we have a house view for the 10-year by year end that's closer to 4.5, so 4.45.

1:01:39So what does that mean for mortgage rates? Are we going to see a five-handle on mortgage rates? So spreads are pretty wide, so there is room. And spreads depend on volatility. Rates volatility has been coming down quite a lot because brokers need to hedge basically the interest rate risk while it's outstanding. So I think it's supportive, but I'm not foreseeing any big decline in interest rates. So maybe another cut this year, one or two more next year? Also, I mean, we don't have the data anymore, so it's going to be gone. Well, there's that. Who needs data? But I wouldn't be surprised if the Fed misses one of those two meetings in terms of the rate cuts and pushes it out.

1:02:23I mean, this is sort of more a, you know, fine-tuning type exercise, I would argue. I mean, if the Atlanta Fed GDP is right, and it's been pretty right for several years, obviously not to all the decimals, but it was giving you some, you know, with that kind of growth, I mean, do we really need lower interest rates? So let me ask the Jerome Powell question. We're seeing the labor market sort of soften, even though we're fairly close to as low as unemployment gets. At the same time, there's a shortage of workers. 2025 may be the first year in history where U.S. population actually declines. less immigration, more deportations, a whole lot of other policy issues that are affecting that.

1:03:13How do you think about the labor market here? And what does that mean for corporate earnings? What does it mean for interest rate policy? Yeah, I think we have a relatively fully employed labor force. And our baseline view basically sees, you know, if you ignore the decimals, a little bit of amounts here and there, not really, you know, changing very much. So the question becomes, you know, who's going to produce that three and four percent GDP? So it was pretty bearish take when we got the revisions basically to the payrolls numbers, the benchmark revision. But, you know, if you're not changing the GDP numbers and you just raise the level of productivity basically.

1:03:55But commensurately. It's not as much of a negative as it looks at first blush. Exactly. Right. I know a lot of economists who look at growth as productivity plus inflation. Fair assessment? Yeah. I would say productivity plus employment. Then to get to the nominal part, you would add inflation. And so, I mean, if you think about, so we talked a little bit about, you know, the parallels as between today and the 1960s and the second half of the 1990s. That's the two periods since World War II, where we had basically productivity growing at 3, 3.5 % for a sustained period of time. Normally, it grows at 1.4%, 1.5%.

1:04:41What's the old line? I forget who I'm stealing this from. Productivity gains are seen everywhere except the productivity data. So that's because, you know, it's calculated as a residual, right? So first you have to estimate GDP. Then you have the first revision, second revision, third revision. Then you have to estimate what we were just talking about, which is the labor input, which is revised and re-revised and benchmark. And then what's left over is productivity. But what I would argue is that if you look at a simple chart of reported productivity in the non-farm business sector, you'll see this growing in a trend channel of 1.4%.

1:05:25And basically what we've had over the last couple of years is we went way above the channel, basically. Post-pandemic. That is right. So we got a pandemic jump, then a slowdown back into the channel. And so over the last two years is what I'm saying. So officially, you know, yes, the immigration issue, but officially unemployment has only been 4 percent was even lower. So it was a tight. Historically, a tight labor market has been a necessary condition for getting those productivity booms like we had in the 1960s and in the second half of the 90s. And we've had a tight labor market for several years right now.

1:06:06Very interesting. One of the things I'm so fascinated about your work is that you're not just a one-way bull. You start the year as one of the most bullish forecasts for the S &P 500, but you're constantly bringing up the various macro risks investors face. That sort of full view and not being so just mindlessly bullish is kind of fascinating. So let's talk about some of the risks that you've been writing about and discussing. Have to start with froth and AI and capital spending. Sure. How do you respond to charges that this market has become frothy? What I would say is basically that, you know, we do see signs basically of rampant speculation.

1:07:03But I would say so far, it's only in basically relatively well-defined pockets. So AI, Bitcoin hit 125 ,000 over the weekend. On AI, I would say it's, you know, what some companies and some deals are doing. You could put in that bucket. But I mean, the stocks are not necessarily doing that. And so I would argue that we are still sort of in the early stages. I would say there's a lot of focus on the retail investor. Now, the question I would ask about the retail investor is, you know, when you look at measures of retail participation or retail activity, you know, it's easy to sort of exaggerate relative to their own history.

1:07:55I mean, we don't have a history of retail participation in U.S. equities since the 90s. So, it's been more episodic, basically. And so there is a tendency to put it in that light that this is an episode. But I mean, we were talking about Asia earlier. It's a long history of retail involvement in all markets. And so one of the things that is getting attention is the presence of retail investors. But from a quantitative point of view, I don't know. I was looking at statistics. So there's conflicting measures. It's fairly modest. And a lot of it seems to be 401k and IRA investing. There's nothing about how, you know, the volumes have taken off and they've skyrocketed and now they account for 4%.

1:08:38Tiny. Exactly. So everything is, you know, consistent and correct. But I would now. You have to frame it appropriately. Yeah. And this is a cycle we're talking about now. But basically, and this is, you know, me speaking as equities, it's a cyclical asset. OK, and so if the cycle continues the way that it has been continuing, all of this is going to grow. But today we are not there yet. What about market concentration, the Magnificent Seven or whatever you want to call the top 10? Sure. Is that as big? Is that really a threat or is that, you know, this happens from time to time when a new technology attracts all this attention and capital?

1:09:21So, I mean, I would put it slightly differently. I would say the market concentration in mega cap growth in tech reflects the concentration of S &P 500 earnings in the mega cap growth. And what are they something like two trillion in revenue, 300 billion in profits? Some some crazy. They're responsible right now for about 40 percent of S &P 500 earnings. So why shouldn't they be 40 percent of the market cap? Exactly. So they're actually 30 percent of earnings and 40 percent of the market cap. I apologize. Oh, so why are they so overweight? Is it just future growth expectations? They're growing faster, so they should definitely have higher multiples.

1:10:03So, you know, people frame the question as focused on the mega cap growth in tech. You can ask the equivalent question. Actually, it's a bigger part than 60%. Why isn't everybody else growing? I got into this a little bit earlier. It's a very peculiar recovery where the cyclical parts basically haven't really kicked in in a big way. But it looks like they are kicking in. What other sectors are kicking in? I know you've written about financials, consumer cyclicals, materials, and then we could talk about EM and small cap and value. Sure. What other sectors have been lagging that you find particularly interesting?

1:10:40So right now, you know, we have what I call simple cyclical tilt to our positioning because I talked about discretionary investors sitting at neutral. Why are they sitting in neutral? Because they're concerned about the cycle. What are they going to buy if they get off and start participating in a bigger way? I would argue they will buy the cyclicals because that's their concern. They're unlikely to buy mega cap growth in tech for well-known reasons, all the reasons that you basically mentioned. So, you know, if you phrase it from, you can phrase the question basically from who's actually going to buy this stuff, I would argue this group stands out.

1:11:16And their concerns suggest that they would buy the cyclicals if they started to believe that the cycle is going to be fine. If you look at it from a fundamental point of view, no, I mean, there aren't no signs of a huge uptick on the cyclical side. But if you wait for those signs, equity market will price it far before. I mean, one of the lessons that I take away is you have to think about the S &P 500 in a recession. You have this big shaded period. Equity market falls 20 percent once the recession starts. But it robustly bottoms around the middle of the recession. Long before. And recovers while you're still in this gray shaded area.

1:11:57So if you wait till payrolls turn negative, you will have missed the entire move and you will be back to, you know, basically catching that small. Exactly. So equities turn up when there's a positive probability that you're going to basically have a recovery because you've been in a recession for so long. You've identified a number of risks earlier in the year, and I'm curious if you still think they are significant. Again, protectionist trade policies and immigration policies. Are those still potential growth pressures or inflation pressures? I think on the tariffs, basically, they've proved to be modest.

1:12:41Exactly. And so I don't worry about that. I don't think it closes the issue. I mean, there could still be negatives that come out of that that we're just not completely aware of yet. But in that event, you know, a big part of our thesis for this year has been that if things get bad, you know, at the end of the day, any administration cares about its approval ratings. The approval rating is about the economy. So they will relent, especially if it's caused by one of the policies. So that's been a big part of our thesis for staying constructive through the year. So, you know, we talk about risks and I'm deeply aware of what most people mean when they talk about risks.

1:13:22But where we are sitting, I would argue that it is my duty to simply point out that right now I'm much more concerned about upside risks than downside risks. A melt-up, a potential... Yes, because we don't... We stop worrying about going into a recession. We stop worrying about the politics and we stop worrying about the tariffs because companies are dealing with it. And suddenly there are blue skies out there. Exactly. So last question before I get to my favorite questions. OK. What do you think investors are not paying attention to or not talking about that perhaps they should? Could be a policy, could be an asset class.

1:14:06What do you think is getting overlooked? The context that we are in, what I was talking about, basically, that a 3 % GDP growth with a 4 % unemployment happens only 5 % or 6 % of the time, and it unleashes certain dynamics. And, you know, it started during the previous administration. It has continued in this administration. So it's not necessarily about the policies. So we've gotten a lot of noise and a lot of headlines and a lot of news coverage. Is that obscuring what is fundamentally underneath everything, a robust economy and a healthy market? I believe so. Really, really interesting stuff.

1:14:52Let's jump to our favorite questions, starting with the question that brought me to you, which is, who are your mentors who helped shape your career? There are so many people, so many guests of this show have mentioned you. Who helped shape your career? So I started my career at the research department at the IMF. And most important mentor, I would say, was my boss. It's a gentleman called Michael Dooley, ex-Federal Reserve, you know, at some of the highest levels, but was at the IMF then. And he, I was just out of graduate school, taught me basically how to think critically, how to stand on my own feet, and most importantly, how to communicate things or the essence of things in a very simple way.

1:15:45That's a great, great answer. Let's talk about books. What are some of your favorites? What are you reading currently? So I'm definitely a fiction reader. It gives me a good break from where I live and what I do. So I'm currently reading Isabel Allende's books. I'm currently on A Long Pedal by the Sea, which is a book about Chile. Really interesting. What about streaming outside of this show? What are you watching, listening to? What keeps you entertained when you have a little downtime? Oh, given my background, I'm definitely a big Bollywood fan. Oh, really? Yeah, I'm very partial to Indian movies.

1:16:25Give us a title that some of our listeners might enjoy. One that I really liked. It's on Prime, actually. It's called Tandav, T-A-N-D-A-V. Uh-huh. What's that about? It's about politics and political career. And unfortunately, they did not allow the season two to be, the authorities didn't allow season two to. In India, they stopped it from going off. Wow. Yeah, yeah. Well, thank goodness nothing like that would ever happen here. But you still watch season one. Yeah. All right. Our final two questions. What sort of advice would you give a recent college grad interest in a career in either economic policy analysis, asset allocation, or just investing?

1:17:11Yeah, I think that, you know, working on Wall Street or in finance, I mean, there's a lot of different things you can do. And I think for young people starting out, the biggest challenge is to figure out where, you know, how do I match basically what I'm most interested in and where my abilities are. And my advice would be to go with where your interests are. The ability will come. I just went through recruiting process and just hired somebody from our grad program onto my team. Interesting. And our final question, what do you know about the world of economics and investing today? would have been helpful when you were starting out back at the IMF in the 1990s.

1:17:55To ignore everything except the economy. You all heard this expression, right, about presidential elections. It's about the economy, stupid. Still accurate. And the S &P 500 is about earnings, period. Positioning, valuation, all kinds of fits in. But the underlying trend is all basically coming from earnings. Totally, totally fascinating. Thank you, Binky, for being so generous with your time. We have been speaking with Binky Chata. He is the chief U.S. equity and global strategist and head of asset allocation at Deutsche Bank Securities. If you enjoy this conversation, well, be sure and check out any of the 577 we've done over the past 11 years.

1:18:45You can find those at iTunes, Spotify, Bloomberg, YouTube, or wherever you get your favorite podcasts. Be sure and check out my new book, How Not to Invest, The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them, How Not to Invest at Your Favorite Bookseller. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Alexis Noriega is my video producer. Anna Luke is my producer. Sage Bauman is the head of podcasts at Bloomberg. Sean Russo is my researcher. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.